May 2024*
Recent activity data is consistent with our base case for a ‘muddle-through’ scenario of trend growth and ‘sticky’ inflation. However, ex-US activity has been stronger than anticipated since our last quarterly update. Overall, the backdrop is consistent with some profit growth and lower interest rates. Still, various leading indicators argue against complacency. Valuations remain elevated for the All Country World Index (ACWI), while the US unemployment rate is rising – a historically ominous signal. Our country allocation consists of a balance between cyclical and defensive beta. This quarter we added to our EM overweight and reduced the UK allocation to underweight.
The ACWI came under pressure in April but is still 24% higher than its October 2023 low. Global equities remain supported by profits, with a concentration of large-cap firms driving this trend. ACWI earnings growth expectations for this year are still a solid 11%. Our cyclical indicators do not signal an imminent directional change to earnings, while the global composite PMI rose 0.6 points over the past three months to 52.4 in April. Interestingly, ex-US surveys are pushing the global composite index higher, while US surveys have started to fall. This trend partly explains why the ACWI ex-US slightly outperformed the MSCI USA Index over the past three months. Overall, earnings trends support global equities, but we may be witnessing some early signs of a rotation away from the US.
While global profit growth remains positive, our scenario analysis justifies some caution against an aggressive pro-cyclical view. ACWI earnings multiples have expanded, bringing the forward P/E for ACWI above historical averages, at around 18x. Rates volatility is one pressure point that could derail stocks if rates reprice higher again. ‘Sticky’ inflation has slowed the projected pace and timing of US rate cuts, but our bias remains towards moderating service inflation and rate cuts (rather than hikes) this year. Still, the slower pace of easing leaves the economy and equities vulnerable if the US unemployment rate continues to rise, which has historically been followed by a recession.
Market Strategy: Our base case this year is a ‘muddle-through’ or ‘no-landing’ scenario where global growth remains closer to trend and inflation is elevated but not rising. The recent uptick in activity adds to further evidence of our base case at the expense of a ‘soft-landing’ scenario (requiring lower inflation) and an imminent recession (requiring weaker growth). Our forward-looking indicators do not anticipate a sharp acceleration in growth or inflation at this current juncture. Overall, our asset allocation favours a balance between cyclical and defensive beta. However, we prefer positions that benefit from a decline in global rates as we assume the US 10-year yield will not rise to a new peak above its 5% level in October 2023. Since the last Quarterly Outlook, we made the following changes to our country allocation:
| Chg | -2 | -1 | 0 | +1 | +2 | |
|---|---|---|---|---|---|---|
| US | – | |||||
| Canada | – | |||||
| Eurozone | – | |||||
| Switzerland | – | |||||
| UK | ↓ | |||||
| Japan | – | |||||
| Australia | – | |||||
| EM | ↑ |
| Chg | -2 | -1 | 0 | +1 | +2 | |
|---|---|---|---|---|---|---|
| Canada | – | |||||
| Eurozone | – | |||||
| Switzerland | – | |||||
| UK | ↓ | |||||
| Japan | – | |||||
| Australia | – | |||||
| EM | ↑ |
*This publication reflects asset performance up to 30 April 2024, and macro events and data releases up to 8 May, 2024, unless indicated otherwise.
The information contained herein is obtained from sources believed by City of London Investment Management Company Limited to be accurate and reliable. No responsibility can be accepted under any circumstances for errors of fact or omission. Any forward looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.